I agree that Oblivion really doesn't look that great. The art design is good, but the facial textures...ugh...Animations are also lacking (I'd love to actually go down some stairs without jumping down from the top) and effects are also quite ugly. People were complaining about how Force Lightning was ugly in KotOR, well lightning isn't much prettier in Oblivion. Physics are a bit screwed up too.
I'm putting money on Crysis for being the most beautiful game. It'll make my computer cry, but still, looks really good.